It’s time for a mid-year Market & Economic update. Investors have certainly been challenged since early January. With so much worry swirling around high inflation, the Russia-Ukraine conflict, the Federal Reserve actions and imminent recession risk, I want to provide you with data that matters and a review of history. With so much good content I have decided to create four separate and shorter videos. Our plan is to send you one video each week for four consecutive weeks.
Week 1 What just happened? Market & Economic update
Week 2 Let’s talk about Inflation and Rising Interest Rates
Week 3 Planning for a Recession
Week 4 Where do we go from here?
I hope you find this content educational and helpful. I want all of us to make good financial decisions so we can reach our long-term goals. Enjoy!
Hey you guys. Doug Pardieck with Talon Wealth Strategies. This is my fourth video in the series that we shot for these summer months of 2022. If you missed any of the first three videos, go to my website TalonWealthStrategies.com and watch those first three videos. This is the fourth one and in this one we’re going to talk about where do we go from here? It’s the summer of 2022 and stocks have been beaten up, bonds have been beaten up, our portfolio values are down substantially in some cases. What do we d from here? Where do we go and what does the economy look like? What does the stock market look like going from here?
Let’s take a deeper dive into the U.S. consumer. This is very important because the consumer makes up roughly 70% of the U.S. economy. If the consumers are healthy and spending money that bodes well for a continued growing economy and no recession in the near term. Take a look at consumer spending. We know this is an important component of the economy. Consumer spending did drop substantially during the pandemic but it’s rebounded and today, the first half of 2022 consumers are still spending money and this is good for the economy.
Let’s take a look at their credit card and cash balances. Bank of America has this research they’ve done. Since the pandemic credit card balances on average are down 8%. That’s good. The average deposit for cash on hand at their banks is up 39%. That’s also a very good indicator. We look at the personal savings of U.S. consumers. There is in excess of $2.1 trillion that the consumer has that the did not have before the pandemic. So, better credit card balances – they’re down, better cash balances – they’re up. All this extra cash on hand bodes well for continued spending and this will fuel the economy to allow it to continue to grow.
Strong wage growth should help the consumers during these higher inflation rates that we’re seeing. Household debt service ratios still historically down. That’s a good indication. What about gasoline prices? Well, on average going back to 1960, the amount of our disposable income we typically spend on gas is 2.7%. Currently we’re at 2.1% of our budget is being spent on gasoline. That’s actually a pretty surprising stat. I did not expect to see that, but that bodes well that these higher gas prices are not going to derail consumer spending.
Take a look at the midterm year election. We talked about this in a previous video, but the blue lie shows us the average annual return of the S&P 500 going back to 1931. The S&P does not perform very well during the midterm year election. Actually, from May to October is the worst six months for the S&P 500 over the course of the four years of a presidency. The time we’re in right now tends to be the worst time for performance of the S&P 500. Take a look at after the midterm year election. Going from November-December onto April of the following year the stock market overperforms. It’s actually the best six month period. This next chart shows us that volatility does increase in the stock market during that midterm year election. We have an average of a 19% drop in the stock market during that midterm year election we’re in right now. We talk about history repeating itself. Right now the stock market is down around 19% from its high we saw back in January. So, history can repeat itself. It may not be exact but it does.
Look at those returns after the volatility is over. From the bottom of the stock market, how much does it rebound over the next 12 months? Well, historically every year we have positive returns and I’m saying 33%, 44%, 58%, 12%. These are some very good returns and we want to make sure we have our holdings in the stocks that we love to take advantage of the rebound that will eventually come.
Finally, I will remind you that the average investor over the last 20 years does very poorly. They behave poorly during these times of high fear and turbulence and volatility in the stock market averaging only 2.9%. I don’t want you to be the average investor. I want you to be more like Warren Buffett. When others are fearful, you need to be greedy. Right now is not the time to stop buying stocks. It’s not the time to sell and get out and go to cash. Now is the time to stay the course and when there’s extra cashflow make sure you’re buying more and more shares before the prices go up again.
I do want you to be prepared for the next recession. We do need to have cash reserves, a fully funded emergency fund. We need to make sure we’ve got good income sources that are reliable to get us through that period when the recession finally does come – and it will come and we need to be prepared for it. Right now history and the data is suggesting it’s not coming soon. It could – there’s a chance, but it looks like it’s probably going to be down the road a little ways.
We’ll stay tuned. We’re going to continue to watch the inflation numbers that are coming in every month and this will dictate how we’re investing and building your portfolios and making changes. Stay tuned and if you have any questions, please call us. Doug Pardieck, Talon Wealth Strategies. Have a wonderful summer and hopefully we’ll see you soon.